Guide to research and development tax incentives in Singapore
R&D plays an important role in any business to kickstart itself within a market such as Singapore. This is especially true if you plan to create or develop and launch new products that have not been sold before.
The problem is that it can be a cost-intensive task and not everyone might have the necessary resources to execute such activities and on top of that pay taxes for the same. This is where research and development tax incentives come into play.
Overview of the R&D tax incentive program
The research and development tax incentive scheme in Singapore has benefited many businesses. In 2018 alone, approximately 520 organizations were able to claim tax benefits from their R&D activities.
According to statistics, the companies that gained the most from these tax incentives were small and medium enterprises making 85% of the claims.
These tax programs are a great initiative by the government as it promotes the idea for businesses to conduct R&D.
And invest in making sure that they’re taking the right business decisions before launching in a market or growing and innovating their products and services further.
What are the eligible R&D activities?
The definition of a qualifying R&D activity is as follows - Under section 2 of the Income Tax Act, R&D is any systematic, investigative and experimental study that involves novelty or technical risk carried out.
In the field of science or technology with the object of acquiring new knowledge or using the results of the study for the production or improvement of materials, devices, products, produce, or processes, but does not include certain activities which are specifically excluded.
Three requirements for qualifying R&D tax incentives in Singapore
Objective
The purpose of the activity you’re conducting as R&D will decide whether it will be considered for the tax benefit scheme or not. This objective must be set out before beginning the R&D activity. Your objective for the R&D activity must be any one or all of the following:
Gain new knowledge: The R&D activity must be such that it enables you to get new information that you did not have access to before.
Create new products or processes: The R&D activity must help you develop new products or a process.
Improve existing products or processes: The objective of the R&D activity should be to gain knowledge or data that helps you make an already existing product or process better.
Novelty or technical risk
The next qualification aspect for an activity to be considered as R&D is that it should be a first of its kind in Singapore or have an aspect of technical risk.
Wherein there is a component of scientific or technological uncertainty that cannot be readily resolved by a competent professional in the relevant field.
If existing research data exists on the topic you want to research, you must prove how it is different from previous research.
Systematic, investigative, and experimental study
The last criterion for an activity to qualify as R&D is that it must be a ‘Systematic, investigative, and experimental study in the field of science or technology.
What are the non-eligible R&D activities?
There are very specific kinds of activities under Section 2 of the Income Tax Act that is prohibited from qualifying for research and development tax incentives.
1. Quality control or data collection
A business cannot pass off general data collection work or routine quality control activities as a form of R&D. For example, testing an already existing product to pass it through regulatory standards is not a form of R&D.
Testing that is done to change or establish new equipment or optimize processes also does not fall under the definition of R&D for the ITA.
2. Market research, sales promotions
General activities such as market surveys, researching a particular niche, or promotional activities for sales cannot be considered R&D.
3. Cosmetic modifications
Cosmetic modifications refer to stylistic changes in a product, process, material, or device. These kinds of developments do not fall under the qualifying definition of R&D.
An example of this could be the change in color, shape, size, or appearance of a smartphone.
Apart from cosmetic modifications, minor changes in the product itself such as changes in some parts or ingredients of a product also do not qualify as R&D as they come under routine modifications.
The reason why many of these exceptions are made is so that there is a clear difference between routine changes and improvements versus putting the focus on R&D in science and technology.
Who is eligible to claim the R&D tax incentive?
1. Taxpayers who benefit from R&D activities
Any tax-paying individual or entity who has the financial responsibility of carrying out the R&D activities and pretty much is accountable for the commercial execution of the R&D.
The intellectual property or other results of the R&D can benefit from the research and development tax incentive.
2. Taxpayers who incur the R&D expenditures
The individual or entity that is incurring the R&D expenditure is also usually a beneficiary of the R&D activities. So these individuals or entities are also eligible to claim research and development tax incentives.
3. R&D service provider
An R&D service provider is an entity that helps businesses conduct research and development activities for them. It is basically a form of outsourcing for R&D services.
These service providers are also eligible for research and development tax incentives under the ITA. Whether the R&D activity is for another business or for themselves to provide better R&D services, they can claim tax benefits.
The only exception, in this case, is if the R&D service provider takes up the project on a cost-plus basis or any other form of fee arrangement, then they are not eligible for the tax benefits as they are not a beneficiary of the R&D itself.
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What are the documents needed to support the R&D tax incentive claim?
In order to claim research and development tax incentives, you must create and maintain proper documentation that verifies the activity being conducted as R&D under the Income Tax Act.
These documents will be needed when your business is requested to show them by the IRAS for claiming the tax benefits.
As a taxpayer, it is important for you to maintain these documents simultaneously when the R&D project is ongoing.
This is helpful to show the legitimacy of the project and how the data available during the period of the project was not enough compared to the results of your R&D.
Documentation is made on the basis of the 3 requirements that qualify an activity as R&D under section 2 of the ITA.
1. Objective
• You must state the specific purpose of the activity you conduct in the R&D plan as internal records for management to approve the project.
• The objective must also elaborate on how the activity goes beyond the research currently available to you.
• It must contain records of research you have done prior to conducting this new R&D activity in the form of inquiries.
• If your R&D was carried out to improve a particular product or process, you must explain how it is different from routine product upgrades or improvements and why it qualifies as R&D.
2. Novelty
Documentation that supports the novelty of R&D in Singapore can include your website, marketing materials, or press statements. Another indicator of novelty is getting a patent for your product or process.
This helps prove that it is a first of its kind in Singapore. Lastly, feasibility studies and literature reviews can also help prove the novelty of your R&D.
3. Technical risk
When there is uncertainty even from a professional in the field of science or technology related to your product or process where they can’t resolve your issue with current methods, then it can prove that there is technical risk involved.
So getting an explanation of the scientific uncertainty that is involved in your R&D from a competent professional and why the current research or methodologies are not enough will act as a supporting document to prove technical risk.
4. Systematic, investigative, and experimental study
To prove why your project qualifies as R&D there must be records to show how your challenges could not be resolved without an SIE study.
Your SIE study must be documented as it was executed. From what steps you took, to the procedures you set, the experiments you conducted, and the results you derived from all of this.
Regardless of whether the activities were successful or unsuccessful in deriving a favorable result for you, the entire process must be documented.
In cases where you outsource the R&D to a service provider, similar documentation must be maintained on their behalf as well.
What are the incentives offered for R&D in Singapore?
Businesses that have qualified R&D in Singapore can claim tax incentive of 250% of expenses incurred for the R&D project if it is done within Singapore and 100% if it is done abroad.
This is a great initiative that helps promote the idea of R&D and pushes businesses to invest resources that create better products and services for the market.
When speaking in percentages, it means that a business has a net saving of 42.5% for R&D in Singapore and 17% for research and development done outside Singapore.
The eligible expense that can be claimed under this tax scheme includes the cost of equipment in the form of capital allowances & consumables, wages and other compensation that your business might have to pay people, and the invoices of service providers if your R&D activity was outsourced.
Suggested read: Guide to starting a business in Singapore in 2024
How to claim Research and development tax incentives?
A company must make the R&D claim in its corporate Income tax return for the relevant year of assessment. R&D tax is claimed while filing the following forms:
Companies filing form C - You must either file a completed version of the Research and Development (R&D) Claim Form (YA 2018 and before) or the Research and Development (R&D) Claim Form (YA 2019 and onwards) along with your company’s C form.
Companies filing form C-S/ form C-S (Lite) - Hold on to your completed R&D claim form and upon the IRAS requesting it, you can submit it.
An important thing to note is that no supporting documents are required until requested by IRAS. But this does not mean that you should not prepare and keep the documentation ready.
As stated earlier the creation of documentation is a process that should be done simultaneously with the R&D project itself.
How can Volopay help in managing your business expenses for R&D?
R&D projects are usually taken up by young startups or medium enterprises that are looking to change the way things are done by bringing about revolutionary products and services.
Doing this comes at a major cost in the form of monetary expenses. For this reason, taking advantage of the tax incentives provided by the Singapore government is crucial to sustaining yourself as a business and keep growing.
Another way to make optimum use of the money that you will be spending on R&D projects or elsewhere for your business is to use an expense management system, open multi-currency business account
An all-in-one expense management platform like Volopay will give you the flexibility to spend money through various financial tools like corporate cards and still maintain complete visibility and control over all expenses thanks to real-time tracking.
So while you can save money through research and development tax incentives, spending efficiently through a platform like Volopay and using your capital judiciously right from the straight will also benefit you in the long run.
FAQs
When looking at R&D from a long-term perspective, it is an asset that helps you develop over time. But when looking at it from a short-term period such as a financial year, R&D must be expensed from an accounting standpoint within the same year that it was conducted.
A partnership is also a type of business entity that pays tax. So as long as the R&D project qualifies under the Income Tax Act, the partnership business can claim tax deductions for the same.
Governments fund R&D to help businesses in their economy to grow and thrive. An initial push in the form of capital from the government can enable organizations to kick off their ventures by making the right decisions that they derive from their research and development activities.
If a sole trader is a taxpaying individual who incurs the expenditures for the R&D activity and is the beneficiary of the same, then they are eligible to claim tax deductions for R&D expenses.
R&D tax relief is calculated on the basis of whether the R&D activity is taking place within Singapore or abroad. R&D activity in Singapore can be claimed at 250% of the expenses incurred and 100% if the R&D project is being done outside Singapore.